The Benefits of an Indemnity-Only Settlement
Like other forms of civil litigation, the majority of workers’ compensation claims settle short of trial. Even claims that have been tried and appealed on multiple occasions tend to settle via lump sum at some point.
Settlement of a claim is comprised of 2 major elements: settlement of future wage loss/indemnity benefits and settlement of future medical benefits. Prior to implementation of the 1994 law, the parties were forbidden from settling future medical benefits. Only wage loss/indemnity benefits could be settled. As of January 1, 1994, both medical benefits and indemnity benefits could be settled simultaneously, irrespective of the date of accident. For the first few years after implementation of the 1994 law, the system was swamped with settlement of medical-only claims where the indemnity benefits had been settled long ago.
For well over a decade after implementation of the 1994 law, carriers adopted the position that nothing settles unless the entire claim settles. Employer/carriers generally insisted that if an injured worker wanted to settle any element of his claim, he was required to settle the entire case.
Mandates from the Centers for Medicare and Medicaid Services (CMS) regarding procurement and implementation of a Medicare Set-Aside Allocation (MSA) in certain cases have resulted in a renewed interest in settling only indemnity benefits while leaving medical benefits open. This article will address the viability and advantages of an indemnity-only settlement in certain cases where insisting on settlement of the entire claim can create problems.
Every carrier remains interested in settling both elements of the case at once, and settling the entire case is clearly the preferred course of action. Certain difficult and high-value claims, however, lend themselves well to resolution of the indemnity benefits. Medical benefits can then be left open indefinitely or settled via lump sum at a future date.
The only disadvantage for a carrier in settling indemnity benefits today and settling the medical benefits later is a slightly higher statutory fee paid to the claimant’s lawyer. The “swing” in the attorney’s fee totals $750 based on the 20%/15%/10% attorney’s fee statute. In other words, the statutory fee is enhanced by $750 if medical and indemnity benefits are not settled simultaneously by virtue of the fact that the first $10,000 of each settlement is subject to the 20%/15% analysis. With a high-value claim, however, an attorney’s fee of $750 often constitutes substantially less than 1% of the claims expenditures, and should not impose an impediment to resolving the right claim in this fashion.
The advantages of settling the indemnity/wage loss benefits while leaving medicals open can be illustrated through the following examples:
Scenario #1: The Claimant is Insisting on Going to Trial
The claimant is out of work and has reached MMI. He is receiving no indemnity benefits, but has filed a claim for PTD which the EC has denied. He is insisting on trial immediately because of his financial situation, but no MSA estimate has been prepared, or CMS has not yet approved the MSA estimate.
Resolving indemnity benefits in this case is a viable course of action because there are risks to both parties in proceeding to trial on the PTD claim. The claimant’s medical evidence may not be as strong as he may like, and there could be some surveillance illustrating he is not quite as disabled as he has alleged. On the other hand, the EC is not confident in defending the claim because the claimant may have a viable PTD claim based upon vocational testimony and an exhaustive job search. The JCC is not very predictable with this kind of claim, and each party bears risk in litigating the PTD claim. Furthermore, even if the JCC denies the claim today, the claimant may pursue another claim for PTD benefits in the future.
By resolving just the wage loss benefits, the claimant has “cashed out” the indemnity side of his case and is no longer in the dire financial circumstances he occupied before settlement of indemnity benefits. The EC has struck an advantageous settlement agreement by resolving PTD on a compromised basis, in consideration of the discount rate and reduction to present value. The EC has also shifted the potential fee/cost liability to the claimant. The parties can then settle future medical benefits once CMS issues its mandate.
Scenario #2: The MSA Does Not Reflect Likely Future Medical Expenditures
The claimant is a PTD recipient and is receiving minimal medical care at the present time. CMS has indicated, however, that the MSA must be funded with $250,000 due to the possibility of future surgery and possible increased medical care over the claimant’s life expectancy.
In consideration of the claimant’s injuries, costs of recent medical care, and life expectancy, the EC does not anticipate ever paying $250,000 in future medical care and treatment. Paying this amount in a lump sum to the claimant makes no financial sense whatsoever. Even if CMS is correct and the EC ends up paying $250,000 in future medical care, that money will be paid out over time, thereby diminishing the financial impact to the carrier.
Scenario #3: Minimizing the Financial Impact of a High MSA
The claimant is relatively young, but was severely injured. He is receiving extensive medical care, attendant care, and other expensive modalities of treatment. CMS has accurately predicted that future medical expenses total $500,000 and has demanded that the MSA be funded with this amount.
Settlement of the indemnity benefits while leaving medicals open in a case like this can minimize the financial impact of future medicals. While CMS has accurately determined that the carrier will likely expand $500,000 in future medical care and treatment for the compensable injuries, those monies will be spent over the course of 20 or more years. The carrier retains the benefit of holding that money for investment purposes throughout all of those years, earning returns on the cash that is not paid to the claimant in a lump sum. The carrier will benefit from the time value of money and investment returns, thereby resulting in present value payments of a sum substantially less than $500,000.
Moreover, with the EC required to continue providing needed medical care (both the type covered and not covered by Medicare), this claimant is protected from the unpredictable increases in non-Medicare covered medical expenses which he would have assumed with settlement of the medical side of his case. Instead, the EC remains liable for all of his related medical needs.
Scenario #4: Reduced Life Expectancy
The claimant is 55 years old and his family is financially dependent upon his receipt of PTD benefits. He is a lifetime cigarette smoker with chronic obstructive pulmonary disease, vascular insufficiency, and diabetes with complications. Due to his compensable low back injury, the claimant sees his treating physician for medication refills 4 times per year. CMS has demanded that the MSA be funded with $50,000 for future medical care and treatment.
In this scenario, it is unlikely that the EC will ever expend even this modest amount in future medical care. Although the claimant may be receiving expensive medications, his personal medical conditions are likely to overwhelm his work-related injuries in relatively short order. A claimant with this litany of unrelated medical problems is probably not going to live anything close to his life expectancy. The projection of future medical care over a normal life expectancy is therefore inflated and represents more than the EC is likely to pay.
On the other hand, the claimant is concerned about providing for his family’s financial future should his unrelated health conditions result in his untimely demise. Settlement of indemnity benefits allows him to secure his family’s financial future with some certainty. Therefore, resolution of indemnity benefits on a compromised basis is a good outcome for both the claimant and the EC.
Scenario #5: Reducing Indemnity Exposure While Awaiting CMS Approval of MSA
The claimant is receiving TPD or TTD, and is a potential PTD candidate. The parties have agreed, however, on a number for settlement of indemnity benefits. An MSA approved by CMS is required, but the EC has not yet referred the file to its MSA vendor for preparation of the MSA estimate.
Settlement of indemnity benefits in this circumstance is a very beneficial course of action for several reasons. First, it allows the claimant the benefit of the immediate receipt of the monies without having to face the uncertain litigation of entitlement to PTD benefits should the temporary disability benefits be exhausted before CMS approval of the MSA. Second, the EC will not have to continue to pay the claimant indemnity benefits during the long period of time when the MSA estimate is prepared and submitted to CMS.
From the EC’s perspective, this prevents the claimant from receiving a potential windfall of temporary disability benefits while awaiting CMS approval of the MSA. However, to ensure timely submission of the MSA, the claimant must insist upon time frames for preparation and submission of the proposed MSA to CMS by the EC as essential terms of settlement.
Scenario #6: Securing Lower MSAs
The employer is fully self-insured. The parties have reached an agreement regarding resolution of indemnity benefits, but the claimant’s medical history suggests that the MSA will be very high. The employer is interested in reducing the value of the MSA.
This is a scenario where a self-insured employer with a very “long view” may benefit substantially by resolving indemnity benefits, waiting a couple of years, and then referring the file for an MSA estimate. While not true in every case, many injured workers significantly reduce their involvement in the medical system once the wage loss portion of the case has settled. The CMS “look-back” period is approximately 2 years. If the MSA estimate was prepared in the midst of litigation when the claimant was treating extensively, the MSA would be very high. Once indemnity benefits settle, however, the value of the MSA falls accordingly if the claimant reduces his receipt of medical care.
The goal of every employer/carrier is, and should remain, settlement of the entire claim. Given the difficulties associated with MSAs, there are complex and unusual claims where settling wage loss benefits now, while anticipating settlement of medicals in the future, is a very good approach. Similarly, there may be situations where it is in the claimant’s best interest to consider settlement of indemnity benefits while preserving his right to ongoing medical care at the EC’s expense.
Other than settling only half the case, an EC faces no detriment in settling indemnity benefits today and resolving future medicals sometime down the road. The final figure from CMS is a “drop dead” number. It cannot be negotiated or revised. This amount will be paid in any event if the case settles. It therefore benefits an EC to settle medical benefits immediately once CMS issues its final mandate, rather than pay for months or years of additional care, and then fully fund the MSA.
Moreover, settling indemnity benefits reduces expenses associated with litigation, removes the risk associated with ongoing litigation, and enables the parties to settle the claim in its entirety (albeit half at a time) without the claimant or the EC pushing the case to trial. Settlement of indemnity benefits while leaving medicals temporarily open can enable the parties to resolve the current outstanding issues and place the claim in a posture for complete settlement sometime down the road.